14-May-2020

1) SP500 May Fall 93% before Finding a Real Bottom
2) Powell Arrests EUR/USD ‘Topside Test’
3) Equity Markets Set To Drop More – Gold above $1,700
4) GBP/USD: 1.2165 Seems To Be the Next Relevant Target for Bears Ahead Of 1.2100

1) SP500 May Fall 93% before Finding a Real Bottom

The SP500 climbed by 36% over the period of harsh quarantine, from the March bottom to the highs of April. Due to this rebound, the index offset 65% of the decline from the peaks of February. However, the stock’s recovery stalled. It may well turn out that it is worth comparing the March collapse of the markets not with October 2008, but with the decline of the US Indices from November 2007 to March 2008. And it means that much deeper fall is to come. Both at that time and now the Fed had enough room for manoeuvre to bring markets back up.

In 2008, the Fed and JPMorgan Chase agreed on financing for the troubled Bear Stearns bank. Then it brought the markets back to growth for exactly two months. During this time, SP500 has added 13%, winning back more than half of the downward dynamic from October to March.

The SP500 climbed by 36% over the period of harsh quarantine, from the March bottom to the highs of April. Due to this rebound, the index offset 65% of the decline from the peaks of February. However, the stock’s recovery stalled. It may well turn out that it is worth comparing the March collapse of the markets not with October 2008, but with the decline of the US Indices from November 2007 to March 2008. And it means that much deeper fall is to come. Both at that time and now the Fed had enough room for manoeuvre to bring markets back up.

In 2008, the Fed and JPMorgan Chase agreed on financing for the troubled Bear Stearns bank. Then it brought the markets back to growth for exactly two months. During this time, SP500 has added 13%, winning back more than half of the downward dynamic from October to March.

2) Powell Arrests EUR/USD ‘Topside Test’

The dollar initially didn’t profit from a risk-off sentiment in Europe yesterday. The US currency declined further as Fed’s Powell highlighted an unprecedented degree of uncertainty regarding the economic impact of the corona virus. It might cause long-term damage resulting in solvency problems and lasting high unemployment. EUR/USD filled offers in the high 1.08-area but the USD changed course as Powell clearly said that negative rates are no option for the Fed. An acceleration in losses on equity markets reinforced the USD safe haven bid. EUR/USD closed at 1.0818 (from 1.0848). The rise of the yen also slowed but USD/JPY still close the session lower at 107.03 (from 107.14).

This morning, Asian equities are joining the self-off in Europe and on WS yesterday, but losses are more modest. The Aussie dollar is correcting further (0.6430 area). The unemployment rate rose less than expected (6.2%), but other indicators suggest that the ‘real’ underemployment is much higher. The New-Zealand government unveiled a massive NZD$50 bln recovery fund. The Kiwi dollar hovers just below the NZD/USD 0.60 level as the debate on negative rates broke the positive momentum of the currency. USD/JPY is drifting below 107. So, the yen is again on equal footing to the dollar with respect to their role as safe haven currencies.

Later today, the calendar mostly contains second tier data, with the weekly US jobless claims the exception to the rule. New claims are expected to ‘slow’ to 2 500K, but remain very high. After yesterday’s downbeat assessment of Fed’s Powell, more bad news from the labour market might weigh on risk sentiment. If so, it might be slightly supportive for the dollar, except for USD/JPY. Yesterday’s rejected ‘topside’ test only confirmed that the room for sustained EUR/USD gains stays limited. We expect more sideways trading in the 1.0727/1.09 range going into a heavy eco calendar tomorrow.

Sterling continued to fight an uphill battle yesterday. The reopening of the economy doesn’t go smooth at all. The risk-off was a sterling negative, too. BoE governor Bailey in an interview clearly indicated that the bank is ready help financing public spending to cope with the economic fall-out of the corona virus. It didn’t sterling much. EUR/GBP closed at 0.8843. With sentiment turning further risk-off and several other issues pending (Brexit, exit strategy), the recent sterling correction could be extended beyond the EUR/GBP 0.8860 resistance.

3) Equity Markets Set To Drop More – Gold above $1,700

The US and European futures are trading lower today as the Federal Reserve’s chairman has failed to assure the markets that they have the tools to prop the recovery. The fact is that “recovery” has become a painful word, and it is going to take some time for the US and the global economy to get back in a healthy state.

Jerome Powell, the Fed chairman, tried his best to assure two things to the markets yesterday. Firstly, the Fed’s support for the markets is unwavering, and they will continue to do whatever it takes to support the economy. The fact that he believes that the labour market may bottom out next months was a positive sign, and this helped the risk sentiment to some extent yesterday. The US markets moved off their lows of the day towards the end of the US session. However, the recovery may not be that fast as previously thought. Such were also views of Jerome Powell, and this has dented the risk appetite among investors today.

Finally, the Fed isn’t ready to look at the possibility of negative interest rates yet. Some members believe that negative interest rates could help their policy, but he seemed too confident that other tools can fight the abysmal economic readings. Again, we didn’t get any clarity concerning what other tools are those.

Perhaps, if the Fed provides some hint about their “other tools,” then the market can assess the effectiveness of those tools. This is because negative rates aren’t the most effective form of monetary policy, and the evidence of this can be seen in Japan and the Eurozone. It is a trap, and once you in that territory, it becomes enormously arduous to come out of this territory. Nonetheless, if you look at the Treasury curve and dollar bets, it appears traders have already started to position themselves in favour of negative rates.

In the commodity space, the precious metal moved higher yesterday on the back of Jerome Powell’s comment. Gold price is back above the 1,700 mark, which is an encouraging sign for the bulls, but it has given up some of its gains due to the strength in the dollar index. The fact remains that traders have started the chatter of negative rates, and as long this speculative argument remains alive, the possibility of gold prices touching the $2,000 mark remains realistic. However, if the Fed kills this argument because the economic recovery starts to take a better shape than the anticipation and there is less about Coronavirus because of effective medicine and vaccine, then we could be looking at a very different scenario altogether.

On the oil front, there is no doubt that we have seen some stellar rally for the current contracts for both Brent and Crude, but the long term outlook doesn’t change much. The demand equation is still lackluster. However, on the supply side, we defiantly have more positive factors playing their factor that are likely to end the backwardness of the oil curve. The spread has started to narrow between the current contract and future contracts. Having said this, it is still difficult to think of a scenario that can lead the oil price beyond the $30 mark by the end of this year. I think the new resistance for the oil price is $30 to $35, and the prices may not reach the $40 any time soon.

4) GBP/USD: 1.2165 Seems To Be the Next Relevant Target for Bears Ahead Of 1.2100

The GBP/USD pair staged a goodish intraday bounce on Wednesday, albeit struggled to capitalize on the move and retreated around 130 pips from daily tops. The British pound gained some traction following the release of less weak UK macro data, showing the UK economy contracted by 2.0% during the first quarter of 2020 as compared to consensus estimates of 2.5%. This coupled with some renewed US dollar selling pressure during the European trading session provided an additional boost and lifted the pair to an intraday high level of 1.2339.

Meanwhile, the Fed Chair Jerome Powell, in a highly anticipated speech on Wednesday, rejected the idea of negative interest rates and provided a much-needed respite to the USD bulls, which, in turn, prompted some fresh selling around the major. Powell also said that the economic path ahead was highly uncertain and subject to significant downside risks. The greenback further benefited from reviving safe-haven demand amid fears about the second wave of coronavirus infections and fading hopes for a quick global economic recovery.

The pair finally settled near the lower end of its daily trading range and remained depressed for the fourth consecutive session on Thursday. The pair slipped below the 1.2200 mark, hitting five-week lows during the Asian session, as market participants now look forward to the BoE Governor Andrew Bailey’s comments for a fresh impetus. Later during the early North American session, the release of the US Initial Weekly Jobless Claims will influence the USD price dynamics and produce some meaningful trading opportunities.

From a technical perspective, the pair now seems to have confirmed a decisive break through the neckline support of a bearish double-top pattern on the daily chart. Hence, the ongoing slide seems more likely to get extended towards April monthly swing lows, around the 1.2165 region, before the pair eventually slides further towards the 1.2100 round-figure mark.

On the flip side, any meaningful recover attempt beyond the 1.2200 mark is likely to confront a stiff resistance near the 1.2260-65 supply zone. That said, a sustained strength above the mentioned barrier might prompt some short-covering move and lift the pair back towards the 1.2300 mark. Some follow-through buying might negate the bearish bias and should pave the way for a further near-term recovery move, possibly back towards the 1.2400-1.2420 supply zone.